Airline Deregulation Act Summary

  • Last updated on November 10, 2022

A federal law passed in order to eliminate the U.S. government’s control of airline regulations, routing, fares, and schedules.

History

The freedom of flight must have been one of humankind’s earliest dreams. It must have been wondrous to watch birds soar, swoop, and land at will, and then lift off again to fly. When humans finally began to take to the skies in flying machines, they little dreamt the skies would one day need controlling, scheduling, and regulating. The idea of free and open skies for anyone who could fly became unrealistic in the increasingly commercial world of aviation, where business and safety were primary concerns.

World War I, which began in 1914, helped to educate the public about aviation and its possibilities. Warring nations began manufacturing war planes with metal bodies, which had previously been made of wood, and developed more powerful engines to increase speed and flying distance. After the war, organized air service developed rapidly in Europe.

By 1921, government subsidies for the development of new aircraft were in place, and most of Europe’s major cities were linked by air service. In 1926, the U.S. government began awarding airmail delivery contracts to private air carriers and subsidizing private air carriers to transport the mail. This development helped to spawn the airline industry. As passenger travel on these early airlines increased, the government quickly became involved with enforcing economic and air safety regulations, as well as awarding mail contracts.

Civil Aeronautics Act

The Civil Aeronautics Act of 1938 established federal control over airline regulation. This influential legislation strengthened the government’s power and led to the creation of the Civil Aeronautics Board (CAB) and the Air Safety Board, a forerunner of the Federal Aviation Administration (FAA).

The CAB took on a role of responsibility and importance. Its four main points of control were to review route requests and grant authorizations; to establish a uniform system of rates and fares; to approve airline mergers, acquisitions, and new entrants; and to rule on unfair competition. The CAB also awarded Certificates of Convenience and Necessity to domestic airlines and assigned carriers to specific routes. Airlines were required to request permission from the CAB, a complicated procedure, for any route expansion or airfare increase. The CAB simplified the fare system and regulated airfares, so that all carriers flying between the same cities had the same fares. Any requests for changes were processed, reviewed, debated, and, in many cases, eventually denied.

The CAB was originally established to ensure orderly competition and growth within the airline industry. Many policymakers believed that if the U.S. airline industry were permitted to operate unregulated, then unprofessional and perhaps unethical competition might develop, leading to the survival of only a few large airlines. If airlines were allowed to choose their own routes, they would avoid servicing small, less profitable communities and cities. Until 1978, the federal government—through the CAB and the Air Traffic Conference, a nongovernmental airline group—controlled all U.S. airline transportation. There was little or no competition among commercial airlines.

Airline Deregulation Act

On October 30, 1978, President Jimmy Carter signed the Airline Deregulation Act, which scheduled the shutdown of the CAB for January 1, 1985. Between 1978 and 1985, the CAB assisted in the transition process. With the impending elimination of the CAB, the domestic airline industry began its own restructuring for the future.

Deregulation of the airlines had many goals, some of which were to allow airlines to set their own fares, thus stimulating competition and lowering fares; to allow airlines to determine their own routing, thereby expanding flight options available to passengers; to allow airlines to discontinue unprofitable routes; and to stimulate growth within the industry by allowing for the establishment of new carriers.

Deregulation led to changes for the entire travel industry as well as the traveling public. Thousands of fares change daily in response to changing competitive conditions, in stark contrast to the fare stability that prevailed prior to deregulation. Deregulation has also given the airlines the freedom to fly wherever they wish. This freedom has spurred the creation of new route structures.

Travelers have benefited from deregulation because of the greater number of lower discount fares available. These new lower fares, fare wars, and promotional airfares have enabled more people to use air transportation than ever before. Competition between the airlines has become intense. Deregulation permitted hundreds of new airlines to start. Many new airlines such as People Express threw the industry into turmoil by offering super bargain fares. As had been expected, many of the major carriers lost money trying to compete at that level, leading some airlines to merge while others just faded away. There were bankruptcies and downsizing. Low-cost, no-frills airlines were established to tap into high traffic corridors and regional market segments. Major airlines have made dramatic efforts to increase customer loyalty with such incentives as frequent-flier programs. They have developed aggressively competitive strategies involving promotions, destination, partnering, code sharing, and as always, the special low-fare promotion.

Airlines will continue to compete fiercely for passengers. New categories of budget airfares with numerous travel restrictions are constantly being developed. Although passengers benefit from reduced prices, travel and ticketing agents must work with complex ticketing and reservation situations. Because printed tariffs can become obsolete before reaching a travel agency, travel agents rely on their computer systems to access fares and information regarding their related purchase requirements.

Deregulation allowed airlines to govern aspects of their commercial dealings. Airlines could establish their own routes and airfares. They could create their own packages and fare plans to effectively compete for more passengers. They may now function as tour operators, providing packaged tours directly to the public. In addition, they may own and operate travel agencies. Thus, they have developed new methods of selling tickets outside the existing travel agency system.

Since the dismantling of the CAB on December 31, 1984, the Department of Transportation (DOT), which was created in 1966, has watched over the U.S. airline industry. The powers of the DOT are more limited than those of the CAB. In writing the Airline Deregulation Act of 1978, Congress had intended that the federal government alone would regulate the airline industry. Federal regulations on any airline industry issue take precedence over the rights of the states or individuals to legally challenge any carrier’s business practices. The DOT regulates and monitors all transportation industry and safety issues in the United States. Because this large task encompasses so many industries, there are specialized administrations under the DOT whose authority is specific to one type of transportation. One branch of the DOT, the Federal Aviation Administration (FAA), plays an important role in the continued regulation of air safety. The FAA has absolute authority over flights passing through U.S. airways.

Hub-and-Spoke System

One result of deregulation was that airlines were granted the new freedom of choosing their own routing, spurring the creation of new route structures. The airlines have basically abandoned point-to-point route systems, in which cities were connected by nonstop flights, in favor of hub-and-spoke networks. A hub is an airport through which an airline schedules the majority of its flights, like a wheel with many spokes radiating from the center of the hub. An airline schedules most of its flights from various cities, or spokes, to arrive at approximately the same time at a designated hub. The airline then schedules most of its flights to depart one to three hours later to other destinations, or spokes, along its routes. This enables flights from the various spokes to be routed through the central hub, where passengers are combined to fly on to a common destination. Today, passengers can change planes at a hub airport on the way to their eventual destinations.

Hub-and-spoke routings benefit the airlines because they lose fewer of their passengers to other airlines through interline connecting services. The hub system has proven beneficial to passengers because it allows them to remain on line, or on the same carrier, all the way through to their final destination. They can change planes at the hub airport without scrambling to change airline carriers and with less possibility of lost luggage and missed connecting flights.

A hub airport is a major connecting center, as well as the typical location of the airlines’ administrative offices. A gateway is a hub for international flights and serves as an arrival and destination point for international travelers.

International Air Transportation Competition Act

In line with deregulation of the domestic airline industry, Congress passed the International Air Transportation Competition Act of 1979. The act, passed in February, 1980, encompassed ten goals. The first was to strengthen the competitive position of U.S. air carriers and to increase profitability. The second was to ensure air carriers the freedom to offer fares and rates that corresponded with consumer demand. The third was to reduce restrictions on charter options. The act also allowed multiple carrier designations for U.S. airlines with permissive route authority so that carriers could respond swiftly to shifts in demand. It eliminated operational and marketing restrictions with respect to capacity and flight frequency. It sought to integrate domestic and international air transportation and to increase the number of nonstop U.S. gateway cities. It provided opportunities for foreign airlines to increase their access to U.S. points if exchanged for benefits of similar magnitude for American carriers with permanent linkage between rights granted and rights given away. It sought to eliminate discrimination and unfair competitive practices against U.S. air carriers in foreign air transportation. Finally, it pledged to promote and develop civil aeronautics and a viable, privately owned U.S. air transport industry.

The passing of the International Air Transportation Competition Act of 1979 reaffirmed the U.S. policy of competition. The established carriers jumped at the chance to expand. They wanted long-haul flights between major cities, where they could attract the most money. What they had not expected was that the introduction of more carriers in the large markets simply meant that the planes were flying without full passenger loads. Because pricing had been placed in the control of the carriers, they did what all businesses do when supply exceeds demand: They lowered their fares. During the fierce price wars of the early 1980’s, it was often less expensive to fly to a destination than it was to drive.

In 1997, the U.S. airline industry launched more than 22,348 flights a day, employed more than 586,509 people, carried 1.6 million people each day, and recorded $109.5 billion in revenues. The 1997 survey of air travelers by the Gallup organization revealed that a record 80 percent of the entire adult population of the United States had flown.

Alliances of the Future

Under deregulation, the airline industry has undergone dramatic change, leading to significant consolidation, hub systems, low airfares in competitive situations, and high airfares where competition was lacking.

The future holds alliances that could involve the largest carriers in the United States. Alliances are being negotiated with an overwhelming range, from equity positions, to code sharing, to frequent-flier programs, reciprocity, and other joint marketing arrangements. International alliances have been debated since KLM (Royal Dutch Airline) and Northwest Airlines linked in 1992. United Air Lines established the Star Alliance, which included Lufthansa, Air Canada, Thai Airways, SAS, and Brazil’s Yang Airlines.

Authorities in both the United States and the European Union are analyzing how to deal with the many major airline alliances. The decisions they make will shape the future of airlines around the world. It remains to be seen whether these alliances will benefit consumers through greater choice, lower fares, greater convenience, and frequent-flier miles or whether they will create monopolies, higher fares, and new noncompetitive situations. Perhaps government action may be needed to call for re-regulation.

Bibliography
  • Gidwitz, B. The Politics of International Air Transport. Lexington, Mass.: D. C. Heath, 1980. An examination of the political and legal aspects of international air travel, featuring maps, a bibliography, and an index.
  • Kane, R. M. Air Transportation. 13th ed. Dubuque, Iowa: Kendall/Hunt, 1999. A classic text on the commercial airline industry in the United States.
  • Solberg, Carl. Conquest of the Skies: A History of Commercial Aviation in America. Boston: Little, Brown, 1979. A history of the U.S. commercial aviation industry, published shortly after deregulation.
  • Waters, S. R. Travel Industry World Yearbook: The Big Picture, 1994-1995. New York: Child & Waters, 1994. A compendium of travel industry statistics.

Air carriers

Airline industry, U.S.

Airmail delivery

Airports

Federal Aviation Administration

Frequent flier miles

KLM

Lufthansa

Mergers

Northwest Airlines

SAS

Ticketing

United Air Lines

Categories: History Content